According to Yahoo News, bond traders are increasingly investing in corporate debt, hoping for a pivot by the Federal Reserve. Corporate bonds have experienced their largest inflows since July 2020, with bond funds seeing over $16 billion in inflows in the month leading up to November 20, according to EPFR data cited by the Financial Times. Junk bonds accounted for approximately $11.4 billion of that amount, while the remainder went towards investment-grade debt. This comes amid growing optimism that the Federal Reserve may have reached the end of its rate hiking cycle and could soon shift to rate cuts.
Spreads, or the added interest rate demanded for corporate debt over safe Treasury bonds, have fallen for both assets. The premium on junk bonds dropped to 3.95 percentage points from 4.47 percentage points, while the spread for high-grade debt dipped to 1.17 percentage points from 1.3 percentage points. This surge in inflows marks a significant turnaround, as corporate bonds experienced over $18 billion in outflows from the beginning of the year to October, according to a Bank of America note. A majority of investors now view high-yield debt as the top contrarian trade for 2024, as per a Bloomberg survey conducted this month. In fact, junk bonds are considered a more reliable investment than regional bank debt or commercial real estate loans. However, traders remain cautious about the type of junk bond they purchase, with the lowest-grade assets still being avoided, as reported by Reuters.
